Nifty tops 22,300: Are markets skating on thin ice? What analysts say

Even as the Nifty seems on course to register decade high fiscal gains, the rally seems to have lost momentum in the recent months, with net gains well below the overall average in FY24 so far.

The Nifty is on course to record its best-ever fiscal year gain in over a decade, barring the stellar outperformance in fiscal year 2021 (FY21), largely on account of Covid-19 related market abnormality. The Nifty 50 index has rallied 26.6 per cent thus far in the first 11 months of FY24. Other than the near 71 per cent surge in FY21, the best fiscal year returns stand at 26.7 per cent in FY15.

In the last 11 months, the Nifty has ended higher on 8 occasions (on a monthly basis), and has delivered an average return of 2.2 per cent as of the end of February 2024. However, the rally seems to have lost momentum in the recent months, with net returns of –0.1 per cent and 1.2 per cent in the last two months, well below the overall average.

The sharp run in the markets, especially in the mid-and small-cap segments, has made valuations expensive, said Christopher Wood, global head of equity strategy at Jefferies, which is the biggest near-term risk according to him.

“The market looks expensive, most particularly from a mid-cap standpoint. The Nifty Midcap 100 Index is trading at 25.9x one-year forward earnings, compared with 20.2x for the Nifty. Still these valuations should be seen in the context of the acceleration in growth which should be anticipated as a consequence of the developing capex cycle, combined with the continuing commitment to government funded capex,” Wood said in his recent note to investors, GREED & fear.

That said, among individual stocks, Adani Enterprises and Adani Ports have gained consistently on a monthly basis – rising up to 119 per cent in FY24. HDFC Bank has been the common loser on a monthly basis, and has lost 12 per cent during this period.

Breadth of the rally

Another worrying factor seems to be the breadth of the rally, which has got narrower in the last three months, and now seems even-steven with an equal number of stocks rising and falling within the Nifty 50 space.

In comparison, in the first six months of FY24, an average 29 out of the Nifty 50 stocks had outperformed the benchmark index 50 in terms of monthly returns. However, in December 2023, even as the Nifty zoomed nearly 8 per cent, only 26 stocks outperformed the benchmark with higher returns.

In fact in February, while the Nifty 50 ended with a gain of 1.2 per cent, more-than-half, i.e. 26 stocks had underperformed the NSE benchmark. The monthly average returns for the Nifty 50 stocks stood at -0.1 per cent.

nifty monthly returns

 

The breadth has got even more skewed on the broader Nifty 500 index. While the index ended 1.5 per cent higher last month, almost 300 out of the Nifty 500 stocks underperformed the underlying index.

Overall for FY24, the Nifty 500 index has gained 38 per cent, out of which almost 19 per cent of the rally post August 2023 has come of thinner market breadth, with on an average 270 stocks underperforming the index in the last six months.

“The markets are undergoing a healthy consolidation phase after a sharp run in 2023. There is no negative catalyst for the markets on the horizon in the short-term. The markets may remain buoyant on elevated valuations. While the indices may remain range-bound and consolidate, stock-specific action is likely to continue depending on news flow,” said Vaibhav Sanghavi, chief executive officer at ASK Hedge Solutions.